(Bloomberg) -- Japan’s top currency official opted to keep market players in the dark over whether Tokyo had intervened in the currency market Monday following a sharp move in the market that sliced 2% off the dollar-yen exchange rate.

“I have nothing to say about whether or not Japan had intervened in the market,” said Masato Kanda, vice minister for international affairs, when asked by reporters if authorities had stepped into markets to prop up the yen. 

“We cannot overlook the negative impact that excessive and abnormal FX fluctuations driven by speculation are having on the nation’s economy,” he added. “So we will continue to take appropriate measures as necessary.”

Japan’s currency had slipped beyond the 160 mark against the dollar earlier in the day for the first time since 1990 adding to losses of more than 10% this year. The sharp strengthening of the yen around lunchtime briefly took the currency back to 155.06. Later in the afternoon it reached 154.54.

“A yen appreciation of about 4 yen within an hour is unlikely to occur in normal trading,” said Takahide Kiuchi, executive economist at the Nomura Research Institute in a note. 

Read more: Yen Rebounds Strongly After First Slide Past 160 Since 1990

The yen remains under pressure as a stark gap remains between interest rates in the US and Japan. With expectations of the Federal Reserve cutting rates repeatedly retreating, the yen has continued to weaken even after the Bank of Japan raised interest rates for the first time since 2007 in March.

Last week’s stand-pat decision by Japan’s central bank and Governor Kazuo Ueda’s press briefing comments further fueled the slide in the currency. 

The feeble yen, now worth less than half its value against the dollar back in 2012, is pushing up import prices and fueling inflation. That’s adding to the squeeze felt by households and companies and generating discontent with Prime Minister Fumio Kishida’s government.

Still, Japanese currency officials don’t have a free hand to take action. They must balance the need to stop the yen plunging against the need to comply with international commitments to let markets determine rates. They must also assess the risk of any intervention being viewed as a failure and spurring further speculation.

The dynamics in the market are unlikely to change for the time being, leaving the yen in a vulnerable position. The Fed is widely expected to leave rates unchanged when it meets later this week, and it will likely take a change in expectations over the path of US rates to turn the tide. 

“The effect of an FX intervention wouldn’t be significant, it would only buy time,” Kiuchi said.

Read more: Why the Yen Is So Weak and What That Means for Japan: QuickTake

Japan’s reluctance to comment on the currency move may keep doubt in the minds of market players over the finance ministry’s stance on intervention. That could serve the ministry’s interests even if it hasn’t stepped into markets by keeping traders warier over possible action. 

An alternative explanation is that jittery market players and trading algorithms in thin liquidity were largely behind the moves as happened in October 2023. At that time, senior finance ministry officials also declined to comment on whether they had stepped into markets, an indication that maintaining uncertainty is part of the their forex strategy.

What Bloomberg Economics Says...

“Our model shows the outlook for the yen is finely balanced, but that the risks are skewed toward appreciation. That means the window for successful intervention is open a little wider than usual.”

— Taro Kimura, economist

For the full report, click here

Tokyo releases figures on currency intervention at the end of each month, with the next statement due Tuesday at 7 pm local time. Japan spent around $60 billion to prop up the yen in autumn 2022. 

The monthly announcement typically excludes the last couple of working days of the month. So in the case that Japan has stepped into markets Monday, the official figures won’t be released until the end of May, enabling Kanda and his colleagues to try to keep market participants second-guessing the ministry’s tactics for a month.

Japan’s Finance Minister Shunichi Suzuki met Treasury Secretary Janet Yellen in Washington earlier in April and together with South Korea’s Finance Minister Choi Sang-mok, they issued a three-way statement expressing concern over the sharp falls in the yen and the won.

Read more: Yellen’s Nod to Japan, Korea Adds Scope for Defending Yen, Won

While that statement prompted some speculation of possible joint action to prop up the Asian currencies, the hurdle for large forays into the market remains high. Group of Seven agreements call on members to allow markets to determine rates, leaving wiggle room for action only if there are excessive or disorderly moves.

Yellen said last week that intervention in markets should occur “only rarely” and with excessive volatility and with prior consultation.

--With assistance from Emi Urabe, Yuki Hagiwara and Isabel Reynolds.

(Adds economist comment)

©2024 Bloomberg L.P.